Inflation climbs to 6.7%, at 13-month high

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Mar 29, 2008, 01.00 AM IST

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NEW DELHI: Inflation has climbed to 6.7% for the week ended March 15, a 13-month high. And this is not a statistical blip-economists have told the Prime Minister that the most sensible thing to do is to tell people to brace themselves for a period of persistent rise in prices, particularly of food and energy.

The development means interest rates will stay high and could rise further-bond yields have already risen and finance minister P Chidambaram has talked of sacrificing some growth to moderate inflation, which he called ���a regressive tax���.

Inflation adds high-octane fuel to politics as well: the Opposition is up in arms, and the ruling party, worried. The government will take fiscal, monetary and supply-side measures to check inflation. Global is indeed local, in the case of inflation. Prices are high and rising in most emerging markets. China beats India not only in growth, but in inflation, too, with consumer prices rising 8.7% in February. The Russian rate of inflation is nearly double that of India���s.

Among the major emerging markets, Brazil alone has moderate inflation. The silver lining is that a large part of the inflation comes from strong growth around the world and the lagged supply response to the resultant demand. China and India���s demand for oil not only pushes up oil prices, but also diverts food crops to biofuel. Rising quality of life in a host of developing countries is pushing up the demand for food as animal feed.

Supply would ease, as ongoing investments in, say, steel and cement materialise augmented production, when additional land is brought under cultivation to meet the rising demand for a host of food and industrial commodities. This would, however, take some time, according to economists. Till then, prices could stay high, provided growth does not collapse.

The wholesale price index (WPI)-based inflation moved up for the sixth week, to touch 6.68% for the week ended March 15, 2008. For the previous week, inflation was 5.92%. The rise in inflation comes on a high base: last year, inflation for the week ended March 17, 2007, was 6.6%.

Unlike in the previous weeks, when the rise in WPI was led primarily by food and fuel prices, this time around, manufactured goods (with a 63.75% weight in the index) have contributed the most. WPI has moved up 3.99% on account of manufactured goods, 1.71% on account of primary articles (weight 22.03%) and 0.93% on account of fuel, power, light and lubricants.

Manufactured product prices have increased by 0.9% over the previous week while the fuel, power, light and lubricants sub-group has gone up by 1%. Metal and steel prices rose for the second consecutive week though some of the increase is due to delayed updating of data last week, according to Rajeev Mallik of JP Morgan, Singapore. Inflation is now much higher than RBI���s tolerance level of 5%. With a large number of states going in for elections this year, the government is not taking any chances in its fight against inflation and is even willing to give up a bit of growth to drive inflation into the comfort zone.

The ammunition to wage the war against inflation is being readied at the highest level. Prime Minister Manmohan Singh on Wednesday held a long brainstorming meeting with leading economists within and without the government to discuss the options for policy action. He has also directed his Economic Advisory Council to examine the matter in detail.

The meeting was attended by Planning Commission deputy chairman Montek Singh Ahluwalia, RBI governor YV Reddy and deputy governor Rakesh Mohan, former economic advisor to the finance ministry Shanker Acharya, public finance expert M Govinda Rao and NCAER director-general Suman Bery. The general consensus, according to a source privy to the discussions, was that government does not have too many options and the general public will have to be prepared for higher inflation in the short run.

But more fiscal measures to ease the supply side could be on the way. The government effected massive duty cuts on edible oils and rice only last week. On Thursday, it withdrew DEPB benefits on steel exports and export of non-basmati rice. It may now have to do the same for other items that have been fuelling inflation. A rate cut by the central bank is completely ruled out in such a scenario.

RBI has left its key lending rate unchanged at 7.75% for a year after raising it five times between June 2006 and March 2007 to cool prices in the rapidly expanding economy. India���s economy is estimated to grow 8.7% in the fiscal year ending March 31, down from 9.6% in 2006-07. The fight is not going to be easy for the government with various factors fuelling inflation. Any depreciation in the value of the rupee as a consequence of reduced capital inflows is also likely to add to the pressure on prices.

Extraneous factors like rate cuts by the US Fed have put pressure on the dollar, which has led to a rise in prices of key commodities. Moreover, global commodity prices have been rising on account of rising demand and falling supply. Rising crude prices have also put pressure on commodity prices. On the domestic front, steel prices have gone up considerably. The 6th Pay Commission recommendations are also likely to fuel inflationary expectations.